The pound is inching higher against the dollar and gilt yields are holding firm across the curve after Chancellor John Healey maintained fiscal discipline in his first autumn Budget, matching investor expectations. His “do no harm” plan will cut a range of energy levies and offer financial support to lower-income households over the coming winter, while also suspending tariffs on a number of food items and raising the minimum wage. On the other side of the ledger, business-tax thresholds will be lowered, compliance rules tightened and the bank surcharge temporarily raised by three percentage points. The government’s headroom against its stability rule will fall to £15bn in 2029-30 before climbing to £22bn in 2030-31, while the deficit is set to shrink from 4.2% of GDP this year to 1.8% in 2030-31.
Hard decisions were postponed. The trajectory for welfare spending looks largely unchanged, and the increases needed to meet Britain’s defence commitments have been pushed into future years. Wealth taxes, meanwhile, have not made it off the drawing board. Headroom of £15bn is thin by historical standards, and it remains hostage both to the Office for Budget Responsibility’s growth assumptions – which were today downgraded for 2027 – and to borrowing costs, which could climb further as the Bank of England tightens policy.
But the muted market reaction also owes much to the communications strategy deployed by Downing Street. Unlike in recent budgets, officials left little to chance in the run-up to the event, carefully trailing substantive details of the package and gauging investor appetite well in advance, helping prevent a buildup in fiscal risk premia.
Britain is winning the “cleanest dirty shirt” contest among sovereign borrowers. Since 2022’s Liz Truss episode, debt has plateaued as a share of gross domestic product, and the IMF’s latest projections show its general-government deficit shrinking by more than in any other G7 country over the next five years. In our view, that should allow the “moron risk premium” embedded in the pound to keep fading, leaving more traditional forces – such as economic growth and monetary policy – to drive the exchange rate. For now, both are pointing in sterling’s favour, suggesting that further gains could be achieved before gravity reasserts itself.
